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Jun 21, 2022

Navigating Law and Taxes when Structuring your Offshore Property Portfolio

Fixed property is a long-term investment with potentially high returns, and buying property overseas is an effective means of hard currency exposure. Yet before signing on the dotted line, please ensure that you have (or at least your advisor has) a sound understanding of all the laws and taxes that come with owning property in a particular jurisdiction. 

As a tangible, stable asset class, property is much less volatile than stocks, making it a sound long-term investment. Yet, before purchasing property, consider the economic and political stability of the country in which you are investing.  

International property investment is an important building block in your aggregate asset allocation but creates some complexity with regards to the transfer of wealth to your heirs.  

“The most important factor that determines the success of our succession lies in the quality of the conversations we have whilst we are alive,” says Louis Venter, a Fiduciary Specialist at Carrick Consult. “These quality conversations happen between the different generations of a family as well as between the financial advisors and the clients’ families.” 

Ultimately, understanding the laws and taxes that apply to the jurisdiction in which you purchase property will ensure you meet both your immediate needs and your succession planning objectives. 

The Law of the Land 

As you externalise your wealth by purchasing property abroad, your succession planning puzzle becomes more complex. “The moment you have assets or heirs that move into other jurisdictions, you’re facing the complexity of both South African and the laws of foreign jurisdictions, and more often than not, these laws are conflicting – this requires an understanding of international law, which attempts to solve these conflicts of legal systems between sovereign nations,” says Venter. In other words, the legal system of the country in which you invest applies to your ownership of a particular asset, a contract you’re entering, your rights with regards to a trust, the way your company functions and the taxation thereof, and these legal systems most probably differ from the legal rules that apply in the country where you live 

Property is somewhat simpler to understand because it is an immovable tangible asset which comes with more certainty as to which legal rules apply. “The laws in the country in which those bricks and mortar are situated will almost always apply,” explains Venter. “Compare this legal certainty with the absolute uncertainty that would apply to an investment in Bitcoin for instance. With something like Bitcoin, your guess is as good as mine as to the country in which the Bitcoin is held. A good test here is the following: if something goes wrong, to which court to I go to enforce my rights?” 

Yet, with succession planning and property, the laws of testation in a particular country can complicate matters. Freedom of testation, which is what exists in South Africa and England, means that people can leave their assets to whoever they like. But this right is not globally uniform accepted principle. On the contrary, absolute freedom of testation is found in only a few jurisdictions. Most countries have a form of forced heirship in one way or another.   

For example, in Mauritius, a popular property jurisdiction for South Africans, there is no freedom of testation. Therefore, a compulsory portion of your fixed property there must go to your children upon your death – it cannot all go to your spouse even if that is what you want. This will impact your estate planning. “Any portion that goes to children is potentially subject to estate duty,” explains Venter. “That’s why you need to understand the consequences of investing in a certain jurisdiction.”

Holding Assets  

Assets can be held in four silos, namely: 

  • The Trust Silo 
  • The Estate Silo 
  • The Company Silo
  • The Pension and life Silo 

Each silo has different laws and tax consequences which also vary in terms of whether you have onshore or offshore assets and heirs. Each asset therefore needs to be plotted individually. 

What’s more, there are different rules governing the type of property ownership permitted in each country. For example, you can’t own property in a trust in France as the country doesn’t recognise a trust as a vehicle through which you can own assets. In Mauritius, the ideal way to own assets is in a trust because of the forced heirship rules that apply. “It’s the same transaction, the same family and participants but because you’re in a different jurisdiction the answer changes,” says Venter.  

“Should you be building a property portfolio in multiple jurisdictions, looking to earn yield as opposed to using the property as a lifestyle asset, a company could be the better structure to use,” says Venter. “But the vehicle through which the company shares are held, might differ from country to country. If you have property around the globe, you’ll likely use different silos for different properties based on the law of the land,” he continues. “You therefore may want to structure your property portfolio differently for different jurisdictions or group similar jurisdictions or types of laws into one structure.”  

If you are leaving assets to the next generation you need to specify what you want to do with regards to each of these silos to ensure your wishes are applied to all of them, he adds. The laws and tax rules of the countries in which your assets are held as well as the countries in which your heirs reside come into play. Yet this can all be calculated in line with your vision and objectives provided you have a solid plan in place with the help of an experienced advisory partner.  

Whatever you do, make sure that neither you, nor your advisor are guessing either the law, or maths. The answers to both the law and maths needs to be found. It’s just easier when you are around. 

For more Navigating Law and Taxes when Structuring your Offshore Property Portfolio, watch our Navigating Tax and Law for Offshore Property Investors (https://www.carrick-property.com/navigating-tax-and-law-for-offshore-property-investors-live-webinar/) webinar. 

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